Entrepreneurial Learning and the Existence of Credit Markets

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Abstract

I explore the economic implications of learning by doing by borrower entrepreneurs who are initially imperfectly informed about their innate abilities. It is shown how entrepreneurial learning worsens the adverse effects of moral hazard, causing the possible disappearance of otherwise viable credit markets and thereby decreasing social welfare. The reason is that learning reduces subjective uncertainty about risky future outcomes, thus encouraging excessive risk-taking behaviour.
Original languageEnglish
Pages (from-to)37-46
Number of pages10
JournalJournal of Economic Behavior and Organization
Volume62
Issue number1
Early online date27 Oct 2005
DOIs
Publication statusPublished - Jan 2007

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Keywords

  • credit markets
  • learning by doing

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